MCB - Metropolitan Bank: The Good The Bad And The Ugly

2023-04-11 06:20:44 ET

Summary

• Metropolitan Bank has lost nearly 70% of its value over the past year.
• The firm's involvement in cryptocurrency and FinTech-related businesses has attracted the interest of short sellers.
• I believe short sellers are overstaying their welcome here as the share price has already been decimated.
• That said, there are too many concerning points here for me to be a bull. Wait for earnings later this month for more clarity.

Metropolitan Bank ( MCB ) is a New York City regional bank with a focus on serving entrepreneurs and fast-growing businesses. It was also involved in the cryptocurrency banking side of things until recently.

As both crypto banks and venture capital focused banks have run into hardship as of late, Metropolitan has come under heavy fire:

Shares have now lost roughly 75% of their value from the January 2022 peak, and are struggling to remain above the March 2020 lows. The stock is down another 50% just over the past few weeks as the regional banking crisis kicked into high gear.

So is MCB stock a great bargain-hunting opportunity, or is this a falling knife that would be better to steer clear of?

Metropolitan Bank Stock: The Good

Metropolitan Bank completed its IPO in 2017. Since that point, it has been a tremendous growth engine.

It increased its annual net interest income "NII" from $52 million in 2017 to $229 million in 2022, marking a more than quadrupling over that period. Earnings per share leapt from $2.34 to $5.29 over the same period.

Metropolitan initially grew quickly thanks to its exposure to cryptocurrency-related banking. As early as 2017, Metropolitan was in the Bitcoin space, and in 2018, it started high-profile prepaid Visa card offerings with partners such as Crypto.com. MCB stock attracted a significant chunk of investor interest as crypto rallied in 2021, and the underlying business thrived as well with a surge in non-interest bearing deposits positioning the bank for additional growth.

That said, there was more to Metropolitan than the now-exited crypto business. It has been an innovator in the banking-as-a-service "BaaS" category, offering a variety of unique products and features to small enterprises such as FinTechs that need a banking partner while launching their apps and functionality.

Metropolitan also has a more diversified deposit base than the bearish coverage lately might suggest. Metropolitan has a sizable retail deposit base which makes up more than a third of total deposits. There are also significant deposits from loan customers and BaaS clients, among others -- it wasn't only crypto money powering the bank's rise. Indeed, Metropolitan stopped accepting new crypto clients back in 2019, and hasn't leaned heavily on that vertical for a while.

Metropolitan should also have a decent position on assets, as it has invested heavily in commercial real estate. Much of this is specifically in skilled nursing, and exposure to offices and retail is modest. Metropolitan will have its challenges, especially if deposits exit the bank to a considerable degree. However, it doesn't seem to be in nearly as bad a position as, say, SVB was a month ago.

The Bad

While the crypto business wasn't a huge piece of Metropolitan's story by year-end 2022, it still contributed something like 10% of annual EPS while offering high-margins and low-cost deposits. In the current funding environment, losing those cheap deposits and having to replace them with outside money at today's rates is going to be a significant drag on profitability.

There is also a decent chance that the bank will lose some BaaS deposits for reasons we'll discuss in a minute.

Even if you assume the bank survives and can get through the current period without too much dilution, shares probably aren't going back to $100 anytime soon. The firm's profitability will be meaningfully damaged by exiting some higher-margin categories while also limiting the bank's future growth prospects.

There is also increasing scrutiny around the bank's assets and balance sheet. This is natural given the current market conditions and MCB's roster of less established clients. MCB suffered a loss in Q4 of last year due to the establishment of a regulatory settlement reserve.

Additionally, the firm's auditor, Crowe, communicated a critical audit matter related to qualitative and economic factors that affect management's provisioning of allowances for loan losses (see page 67 of the 10-K for more details).

The Ugly

Short sellers have been hounding Metropolitan Bank since well before the acute phase of this crisis started. Many of the complaints were similar to those against Signature Bank (SBNY), namely that Metropolitan was involved with bad actors, especially in the cryptocurrency space. The criticism has intensified over the past month.

For example, Metropolitan provided banking services for the Voyager cryptocurrency platform. Voyager Digital was advertising that it itself was FDIC-insured and that customers who invested in Voyager would receive FDIC protections on all of their funds at Voyager. According to the FDIC, these were false representations and the FDIC insurance only extended to Voyager funds held in its account with Metropolitan Bank.

Short sellers have made a point of claiming that this is fraud, and that Metropolitan's banking-as-a-service "BaaS" is enabling these sorts of financial shenanigans. According to the short sellers, Voyager wasn't an isolated case, and they point to other services such as MyBambu which allow money transfers to international markets potentially with insufficient scrutiny using Metropolitan Bank as the intermediary.

It'd be easy to argue that all the liability for any wrongdoing using these sorts of services falls on Voyager or whoever else misrepresents the FDIC relationship. However, it appears Metropolitan has come under additional scrutiny from regulators due to some of its more innovative banking-as-a-service products. From the firm's most recent 10-K, we find:

Recently, federal bank regulators have increasingly focused on the risks related to bank and fintech company partnerships, raising concerns regarding risk management, oversight, internal controls, information security, change management, and information technology operational resilience. This focus is demonstrated by recent regulatory enforcement actions against other banks that have allegedly not adequately addressed these concerns while growing their BaaS offerings.

Additionally, there are ongoing investigations by federal and state governmental entities concerning a prepaid debit card product program that was offered by the Company through an independent program manager.

The last bit there is particularly of concern. MCB would seem to potentially be liable depending on how those ongoing investigations into its prepaid debit card program work out.

In normal times, this sort of stuff probably wouldn't be a big deal. Pay a fine and move on if there was any wrongdoing. But these are not normal times for the banking industry. Fear and panic rule the day. Any bank that seems too innovative or pioneering could find itself facing a deposit run in current market conditions. I doubt regulators would normally make a big deal over some excesses in a bank's new products department, but at the present time, even a minor regulatory action could lead to bigger problems given that confidence is so shaken.

I'd also note that as of Dec. 31, 2022, MCB obtained 23.5% of its total deposits through its BaaS offerings. If regulators crack down on MCB's products here and/or MCB decides to step back from the more innovative parts of this product line, it could cost MCB a significant chunk of its liquidity at a time when liquidity is already scarce.

MCB Stock Verdict

I assign MCB shares a neutral rating at this point. There are various things that could go wrong here which could wipe out the bank. Banks, more than most businesses, have to have their credibility intact to remain strong franchises.

Between the slumping price of MCB stock and the various allegations and scandals that short sellers have been pointing to, it seems likely that Metropolitan will see a significant number of clients leave and profitability fall within its core banking operations.

That said, in my view, it seems too late to be shorting Metropolitan shares here as well. Short interest has jumped to more than 5% of the float as of last report, and has likely continued to rise in the interim as MCB stock receives more scrutiny on social media.

Puts have also gotten exceptionally expensive. December 2023 $30 puts, for example, are trading at around $9 at the time of this writing, with the stock at $29. Merely to breakeven, shares would have to drop to $21 by expiry, and the stock would have to drop to $12 for a trader to double their money on this put position at expiry. This massive level of implied volatility speaks to an equity where market makers are already preparing for the worst.

As a reminder, MCB stock had a 52-week high of $105 per share. It's doubtful that the stock would trade back anywhere near that level anytime soon. That said, for a short position at $29, that's cold comfort. If the stock goes back to 10x normalized earnings and 1.0x book value, that'd represent a share price in the mid-$50s or nearly a double from today's level.

Metropolitan is set to report its Q1 results on April 18th. We should learn a lot more about the bank's condition and management's plan to address the current crisis of confidence at that date. Until that point, however, I'd be very cautious about either owning MCB stock or shorting it as the potential range of outcomes here remains extreme.

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